The pandemic’s economic shock hit workers’ compensation insurers especially hard. In just a month and a half, from mid-March through the end of April 2020, the country lost 20.6 million jobs. Employees were laid off or furloughed. Many businesses shut down for good. The unemployment rate spiked to 14.7%, just two months after hitting a 50-year low of 3.5%. And the impact on workers’ comp insurers was dramatic – net written premium declined 10%.
Flash forward to August 2021. The unemployment rate has fallen to 5.2%. Combined ratios and operating margins are at historic highs, and workers’ comp continues to be the most profitable property and casualty line.
The outlook may appear rosy now, but challenges remain. The market is shifting and insurers will need to adapt. Critical technology gaps remain and those that fill these fastest will be well-positioned to gain a competitive advantage.
Workers’ Comp Challenges Brewing
Workers’ comp insurers should enjoy the market rebound while they can. Shifting demographics, changing work arrangements, and escalating claims costs are all conspiring to make the life of a workers’ comp insurer even more complex. Four trends, in particular, are troubling:
Slow Employment Growth. The Bureau of Labor Statistics expects employment growth to slow through the end of the decade, due largely to an aging workforce. Expect to see a corresponding slowing of workers’ comp premium growth. And although older workers tend to file fewer workers’ compensation claims, when they do, the costs are typically higher.
The Gig Economy. Freelance (gig) workers in the US increased from 53 million in 2014 to 59 million in 2020. Most of these individuals are classified as independent contractors who receive no benefits, including workers’ compensation insurance. Along with part-time and temporary workers, this group represents an astonishing one out of three U.S. workers. As the economy continues the shift to gig workers, payrolls – and workers’ comp premiums – will decline.
Labor Shortages. In certain industries, employers are struggling to get workers to return to their jobs. Restaurants are a prime example. With fewer workers, employees work longer hours, leading to increased workplace fatigue and a higher likelihood of workplace injury. Labor shortages are also forcing employers to hire less-experienced workers. Inexperienced personnel often lack safety training and may be more willing to take unnecessary risks leading to a rise in workplace injuries (43% of workers’ comp claims are from employees on the job 0-5 years).
Social Inflation. In 2021, workers’ comp losses are expected to increase in frequency and severity. According to the Insurance Research Council, mega claims of $3 million or more can largely be attributed to social inflation — a growth in liability costs due to increased litigation, rollbacks of tort reforms, and an anti-corporate bias that has resulted in large jury awards favoring the plaintiff.
These four trends will eventually put a squeeze on workers’ comp insurers’ top and bottom lines. Slower employment growth and the shift to gig workers will find insurers chasing fewer insurable risks, driving up competition. Insurers will require ever more creative ways to set themselves apart from competitors. Technology will play a prominent role.
Likewise, with an aging workforce, inexperienced new hires, and social inflation all combining to drive up claims costs, insurers will need to apply technology to preserve a profit picture that is the envy of the industry.
Will Innovation Rise to the Challenge?
Technology can help address these looming challenges. However, innovation continues to be hampered by inflexible legacy systems and a failure to see technology as a source of competitive advantage.
The COVID pandemic accelerated the movement toward a “digital-first” environment, but according to Rising’s 2020 Workers’ Compensation Benchmarking Study, managing data and workflows remains a major challenge. Adoption is still low for technologies that worker’s comp professionals say will have the greatest influence on cost reduction, loss mitigation, and service improvement.
New Approaches to Cost Reduction
The Rising study found that telemedicine was one of two technologies that will have the most significant influence on workers’ compensation in the next five to 10 years. (See “Loss Mitigation” below for the other). Not surprisingly, its use jumped dramatically with the onset of the pandemic. FAIR Health’s Monthly Telehealth Regional Tracker shows telehealth claim lines increased by over 4,000% in 2020.
Telemedicine has the potential to improve access to treatment, shorten return-to-work times, and reduce overall claim costs. Injured workers can get the treatment they need without having to wait for an in-office appointment. Telemedicine also has the benefit of limiting transportation costs to and from doctor visits and improving the precision of claim compensation evaluations.
Beyond telemedicine, the introduction of straight-through processing can reduce cost by eliminating the manual handling of rote tasks, freeing up adjusters to focus on more complex claims that require an expert touch to ensure better outcomes. An efficient workflow passes through 60-70% of medical bills without human intervention. Even so, less than 23% of professionals surveyed said they automate 50% or more of workers’ comp medical bills using straight-through processing.
Smarter Approaches to Loss Mitigation
Given the upward trajectory in claims costs mentioned earlier, insurers will need to proactively identify potential areas of risk with their clients and pursue more aggressive risk mitigation strategies.
Forward-thinking insurers are applying artificial intelligence (AI) and predictive analytics, as well as sensors and wearables to help avoid or mitigate losses. Predictive analytics is the second technology that survey respondents believe will have the most significant influence on the workers’ comp industry over the next decade.
Analytics has the potential to drive loss mitigation by predicting claims frequency and severity. In fact, 74% of surveyed claims professionals are using analytics in some form, with frequency and severity prediction being the most prominent application. And when coupled with workflow automation and alerts, analytics become even more powerful, reducing the time and cost associated with administrative and compliance activities.
Communications to Drive Customer Satisfaction
With a more competitive workers’ comp market on the horizon, the customer experience will play a more prominent role in attracting and retaining customers.
According to a PwC study, the movement toward a personalized customer experience in insurance is still in its infancy. Insurers that take a customer-centric approach with a focus on customer satisfaction can establish a competitive advantage. This is especially true for workers’ comp insurance, where a highly regulated product demands that insurers look to quality of service for differentiation.
Communication would be a good place to start. Research shows that the faster an insurer receives notice of an injury and can initiate medical treatment, the faster the injured worker recuperates and returns to work, and the less likely he or she is to engage an attorney to help deal with a claim. Electronic communications (text messaging or mobile apps) can speed up the first notice of loss, while email or text messages throughout the claims process can keep all parties informed about how treatment is progressing.
Despite the advantages of communications technologies, over one-third of frontline claims professionals say they still need better tools to communicate with injured workers and other claims stakeholders. Of those surveyed, only 36% are using text messaging (the method preferred by most consumers) and only 26% are using mobile apps, while 43% report no implementation of tools to improve communication with claimants.
Workers’ comp insurers may have put the worst of the pandemic behind them, but its impact and uncertainties remain. Even if we see no recurrence of last year’s employment shock, new challenges threaten to reshape the worker’s comp landscape for years to come. Insurers that take advantage of today’s favorable market to fill their technology gaps will position themselves to ride out the next storm and emerge even stronger.